In Chapter 3 we are learning how using and analyzing cost behavior can improve profitability. Cost behavior is the study of how a cost changes when the level of volume or output changes. Typically, the output is what a company is selling or offering to customers. Read the article about Airbnb and answer the following questions. (picture of article included in post)

1. What are some of the costs mentioned in the article that Airbnb hosts incur?

2. List a few costs and categorize them as fixed, mixed, or variable

3. Why do you think accurate cost estimation is so important for an Airbnb host?

Using Cost Behavior Knowledge to Improve Profitability at Airbnb Have you ever wondered what it might be like to live along the Puget Sound in Seattle, among snowpacked mountain peaks in Montana, or in a centuries-old castle in Ireland? Or how about hosting your family's holiday get-together at a grand home with a designer kitchen? If so, you might want to rent your next vacation lodging through Airbnb by choosing from among its 7 million homes, boats, and treehouses - owned by 3 million hosts - in over 1,000 cities across 191 countries worldwide. Airbnb hosts have earned over $65 billion in revenues from renting out their homes since the company's founding in 2008 at San Francisco. It is understandable how a revenue number this high has grabbed the attention of so many hosts. However, before Airbnb hosts can make positive profits, they must carefully consider and understand the numerous associated costs, including how they behave in various and sometimes drastically changing business environments. For example, hosting involves variable costs, such as the time commitment for emailing guests (e.g., concerning restaurant and sightseeing recommendations and key pickup and drop-off procedures) and Airbnb management (e.g., about guest complaints or refunds). Additional variable costs include rental property upkeep, such as inspecting and fixing and replacing household furniture and other restocking items that wear out faster with increased guest usage. Other upkeep costs are fixed in nature, such as inspecting and fixing and replacing household appliances (e.g., toaster, dishwasher, washing machine, clothes dryer, HVAC units, and water heater), as well as other systems like landscape sprinklers, automatic garage doors, and high-tech security systems that do not vary as the number of guests increases or decreases. Another important fixed cost pertains to the provision of reliable high-speed internet access. However, perhaps the most critical fixed cost involves the administration of a timely and accurate reservation management process, as well as a reliable bookkeeping system to track the exchange of fees, deposits, and other financial items. In addition, due to the often unexpectedly large time commitment to manage properties, some Airbnb hosts hire third-party property management services to help provide neighborhood-specific tips, assist with the guest check-in process, purchase and deliver cleaning and other supplies, and thoroughly clean the rental properties between guest stays, which during busy season might only provide a cleaning window of a day or even only a few hours. These third-party property management contracts can be structured such that the host pays the property manager a fixed monthly fee plus a commission for each assisted guest booking, which represents a mixed cost for the host. Finally, some home insurance policies call for the monthly premium to increase each time that cumulative monthly occupancy reaches a new level, which represents a step-function cost for the host. Beyond understanding cost behavior, hosts also need to grasp other important cost terminology. Some Airbnb hosts decide to purchase multiple properties in order to provide them with additional rental revenue. For example, roughly one-third of Airbnb hosts run between 2 and 24 properties, whereas another one-third of hosts run more than 25 properties. This leveraging strategy provides potential for considerable revenue generation. However, it also raises significant risks, such as the cost of making properties. In other words, these mortgage payments are nondiscretionary costs in nature because they will persist even when properties go unrented. For instance, one Airbnb host, Cheryl, experienced the reality of nondiscretionary costs hitting home during a significant and unexpected economic downturn that caused many typical Airbnb guests to stay home. During this time, Cheryl's Airbnb rental revenue fell to almost zero for an extended period. However, she still had to make her $22,000 in monthly mortgage payments during this downturn. Therefore, in addition to forecasting demand and rental revenues, profitably managing one or more Airbnb properties requires that hosts accurately estimate the various costs described earlier. Accurate cost estimates rely heavily on understanding cost behavior patterns, cost terminology, and various forecasting techniques studied in this chapter. With an informed cost management perspective, Cheryl and other Airbnb hosts are better prepared to manage and enjoy the additional net income that can arise from their participation in the challenging but exciting guest lodging industry. Costs can display variable, fixed, or mixed behavior. Knowing how costs change as activity changes is essential to planning, controlling, and decision making. For example, budgeting, deciding to keep or drop a product line, and evaluating the performance of a segment all depend on an understanding of cost behavior. Not knowing and understanding cost behavior can lead to poor-and even disastrousdecisions. This chapter discusses cost behavior in depth so that a proper foundation is laid for its use in studying other cost management topics. Cost-volume- profit analysis (Chapter 16) and variable-costing systems (Chapter 18), for example, require that all costs be classified as fixed or variable. This chapter describes ways of separating costs into fixed and variable categories, discusses the assumptions and limitations underlying these methods, and assesses the reliability of these procedures